Why doesn't change in accounts receivable on balance sheet match cash flow statement?

Question

If we take a look at the balance sheet for Microsoft, I see Net Receivables as 21,485,000 [2014] and 19,118,000 [2013]

On the cash flow statement, I see Changes In Accounts Receivables as (1,120,000).

This doesn't match the change in receivables from the balance sheet: 21,485,000-19,118,000 = 2,367,000

In general, I'm wondering how to reconcile/tie-together the Changes in... items from the operations portion of the cash flow statement to their counterparts on the balance sheet.

I seem to be missing something fundamental because the math also doesn't work for inventory (haven't checked the other two).

Answer 1

I'm not an expert, but here is my best hypothesis. On Microsoft's (and most other company's) cash flow statements, they use the so-called "indirect method" of accounting for cash flow from operations. How that works, is they start with net income at the top, and then adjust it with line items for the various non-cash activities that contributed to net income. The key phrase is that these are accounting for the non-cash activities that contribute to net income. If the accounts receivable amount changes from something other than operating activity (e.g., if they have to write off some receivables because they won't be paid), the change didn't contribute to net income in the first place, so doesn't need to be reconciled on the cash flow statement.

Answer 2

QUICK ANSWER

What @Mike Haskel wrote is generally correct that the indirect method for cash flow statement reporting, which most US companies use, can sometimes produce different results that don't clearly reconcile with balance sheet shifts. With regards to accounts receivables, this is especially so when there is a major increase or decrease in the company's allowances for doubtful accounts.

In this case, there is more to the company's balance sheet and cash flow statements differences per its accounts receivables than its allowances for doubtful accounts seems responsible for. As explained below, the difference, $1.25bn, is likely owing more to currency shifts and how they are accounted for than to other factors.

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DIRTY DETAILS

Microsoft Corp. generally sells to high-quality / high-credit buyers; mostly PC, server and other devices manufacturers and licensees. It hence made doubtful accounts provisions of $16mn for its $86,833mn (0.018%) of 2014 sales and wrote off $51mn of its carrying balance during the year.

Its accounting for "Other comprehensive income" captures the primary differences of many accounts; specifically in this case, the "foreign currency translation" figure that comprises many balance sheet accounts and net out against shareholders' equity (i.e. those assets and liabilities bypass the income statement). The footnotes include this explanation:

Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”)

What all this means is that those two balance sheet figures are computed by translating all the accounts with foreign currency balances (in this case, accounts receivables) into the reporting currency, US dollars (USD), at the date of the balance sheets, June 30 of the years 2013 and 2014.

The change in accounts receivables cash flow figure is computed by first determining the average exchange rates for all the currencies it uses to conduct business and applying them respectively to the changes in each non-USD accounts receivables during the periods.

For this reason, almost all multinational companies that report using indirect cash flow statements will have discrepancies between the changes in their reported working capital changes during a period and the dates of their balance sheet and it's usually because of currency shifts during the period.

Answer 3

Increase in A/R in balance sheet includes the A/R of acquired businesses.

Change in A/R in cash flow statement might say "excluding effects of business acquisitions".

Answer 4

It is difficult to reconcile historical balance sheets with historical cash flow statements because there are adjustments that are not always clearly disclosed. Practitioners consider activity on historical cash flow statements but generally don't invest time reconciling historical accounts, instead focusing on balancing projected balance sheets / cash flow statements. If you had non-public internal books, you could reconcile the figures (presuming they are accurate).

In regards to Mike Haskel's comment, there's also a section pertaining to operating capital, not just effects on net income.

Answer 5

Sizeable M&As for the year during which they are made might also cause similar descrepancies between these two statements in terms of working capital related items. Furthermore - Microsoft is one of the companies which makes acquisitions and may falls into this case.

Consolidated Balance Sheet of the parent company for the previous year does not include current assets/liabilities of companies acquired during the year, however it does include aforementioned Balance Sheet items for the current year. However, to accurately reflect cash flows in Cash Flow Statement (hence is the name of the statement) - the difference in comparable working capital items (inventory/AP/AR) is necessary to be calculated. I.e. to get an amount of cash generated from the inventory during the given year (i.e. "change in inventory" item in the Cash Flow Statement) - the difference in the inventory of parent company and the difference in the inventory of subsidiary needs to be summed up. As you suspect - not all of the necessary information is available in Consolidated Balance Sheet of the parent company. Otherwise just taking the difference in the inventory from the Consolidated Balance Sheet of the parent company would not provide you a real cash flow generated from the difference in inventory of both companies, as the fact that the subsidiary had some inventory before it was acquired would be completely ignored and the calculation would yield a very wrong result.